GlaxoSmithKline's third-quarter sales drop 8 percent on weakness in Europe

GlaxoSmithKline announced Wednesday that sales in the third quarter dropped 8 percent versus the year-ago period to 6.5 billion pounds ($10.5 billion), missing analyst estimates of 6.7 billion pounds ($10.8 billion), which the company said was mainly due to "continued weakness in European markets" and lower revenue from the US. Net income for the three-month period reached 1.1 billion pounds ($1.8 billion), down from 1.4 billion pounds ($2.3 billion) in the same quarter of 2011.

"It is clear that the European market is facing a prolonged period of significant economic pressure," remarked CEO Andrew Witty, adding that "in the short run, over the next quarter or two, I see no cause for optimism." In the third quarter, drug and vaccine sales in Europe declined 9 percent to 1.2 billion pounds ($1.9 billion), marking the fourth consecutive quarter of decline. GlaxoSmithKline noted that price reductions in the region were about 7 percent, while increased mandatory generic substitution compounded the situation.

Witty added that beyond government cost pressures, the cross-referencing of medicine prices in Europe is creating a "pan-industry phenomenon." He said that given the situation in the region, GlaxoSmithKline is "reviewing our current business and assessing how best to respond...and meet the increasingly diverse needs of European governments." Witty declined to say whether the European review would entail job cuts, and reiterated that GlaxoSmithKline would be hiring more people in the long run in the UK. Looking ahead, Witty remarked that it could be an option for drugmakers to scale back on innovation and relocate to Asia or the US if European governments continued to impose drug pricing cuts as part of austerity programmes. "It is not reasonable for governments to believe that they can continue to make these sorts of price reductions and delay the introduction of novel medicines without that creating unintended consequences," he added.

GlaxoSmithKline also noted that sales of pharmaceuticals and vaccines slipped 6 percent year-over-year in the US to 1.8 billion pounds ($2.9 billion), which the drugmaker noted reflected "genericisation and discontinuation of certain products," including the ending of a co-promotion agreement for Vesicare and declining revenue for Avandia and other older products. Sales in emerging markets grew 11 percent to 1.2 billion pounds ($1.9 billion), boosted by Latin America, the Middle East and Africa and China. However, revenue slumped 25 percent in Japan to 440 million pounds ($709 million), which GlaxoSmithKline attributed to strong Cervarix sales in the same quarter of 2011 as part of the country's HPV vaccination catch-up programme.

The drugmaker noted that quarterly sales of Seretide/Advair rose 2 percent to 1.2 billion pounds ($1.9 billion), while revenue from Flovent increased by the same percentage to 185 million pounds ($298 million). In addition, sales of Avodart climbed 9 percent to 199 million pounds ($321 million), with growth driven by the launch of the product in Japan and the combination therapy Duodart/Jalyn in Europe.

In the vaccines unit, sales of Infanrix/Pediarix jumped 11 percent versus the prior-year period to 200 million pounds ($322 million), which GlaxoSmithKline said was mainly due to strong growth in emerging markets as a result of phasing of tender shipments. Meanwhile, revenue from Cervarix plummeted 79 percent to 45 million pounds ($72 million).

Witty said that despite the challenges it faces, the company expects "to see sales grow in the fourth quarter," and the drugmaker also reaffirmed its forecast of annual revenue for 2012 to be in line with last year. GlaxoSmithKline indicated that it also still expects to repurchase between 2 billion pounds ($3.2 billion) and 2.5 billion pounds ($4 billion) worth of shares this year, with Witty noting that buybacks next year will probably follow a similar pattern, depending on whether other opportunities arise.

Keith Bowman of Hargreaves Lansdown Stockbrokers noted that the "results have again failed to inspire. Europe continues to weigh, whilst hoped-for new product sales are yet to compensate for disposals and tough comparatives." Edison Investment Research analyst Mick Cooper remarked that "austerity measures in Europe are having a significant impact on [GlaxoSmithKline's] growth but fortunately the company has a strong late-stage pipeline" and new products "should help the company return to growth."

For further analysis, read ViewPoints: Will European austerity measures prompt structural changes at GlaxoSmithKline?

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